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Difficulty: HardFederal Reserve Board (FRB) and Margin Regulation

An investor with a newly opened margin account executes two transactions on the same day: purchasing 200200 shares of an initial public offering (IPO) stock at $50\$50 per share that was issued 1010 days ago, and purchasing 400400 shares of an exchange-listed marginable common stock at $35\$35 per share. Under Federal Reserve Board Regulation T, assuming standard initial margin requirements, what is the total minimum dollar deposit required from the investor to settle these trades?

Answer: 17000 $

Answer

The total minimum dollar deposit required under Federal Reserve Board Regulation T is $17,000\$17,000.
Under Federal Reserve Board (FRB) Regulation T, the initial margin requirement for eligible (marginable) equity securities is 50%50\%. However, newly issued shares from an initial public offering (IPO) are non-marginable for 3030 days following their issuance. Consequently, the investor must deposit 100%100\% of the purchase price for the IPO shares (200 shares×$50=$10,000200 \text{ shares} \times \$50 = \$10,000) plus 50%50\% of the purchase price for the marginable stock (400 shares×$35=$14,000×0.50=$7,000400 \text{ shares} \times \$35 = \$14,000 \times 0.50 = \$7,000), totaling a minimum required deposit of $17,000\$17,000.

Step-by-Step Solution

1
Determine marginability and calculate deposit for the IPO stock purchase
Deposit required = $10,000\$10,000
Federal Reserve Board Regulation T prohibits extending credit on new issues (IPOs) until they have been outstanding for at least 3030 days. Thus, the investor must deposit 100%100\% of the $10,000\$10,000 purchase price (200 shares×$50200 \text{ shares} \times \$50).
2
Calculate initial margin deposit for the exchange-listed marginable equity
Deposit required = $7,000\$7,000
Standard exchange-listed common stocks are marginable securities subject to the FRB Regulation T initial margin requirement of 50%50\%. The calculation is 50%×(400 shares×$35)=50%×$14,000=$7,00050\% \times (400 \text{ shares} \times \$35) = 50\% \times \$14,000 = \$7,000.
3
Sum the total required Regulation T margin deposits
Total deposit = $17,000\$17,000
Combining the 100%100\% cash requirement for the non-marginable IPO shares ($10,000\$10,000) and the 50%50\% margin requirement for the marginable equity ($7,000\$7,000) yields a total required deposit of $17,000\$17,000.

Key Concept

Federal Reserve Board Regulation T Marginability Rules and Initial Margin Deposit Calculations
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Topics

Federal Reserve Board (FRB) and Margin Regulation

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